H.F. 997 (Mullery); S.F. 847 (Langseth) amends Minnesota Statutes, Section 356.24, which restricts the establishment of employer-funded supplemental retirement plans, by expanding the plumbers’ and pipefitters’ national pension plan exception added in 2002 to include plumbers’ and pipefitters’ local pension plans.

Minnesota Statutes, Section 356.24, when initially enacted in 1971 (Laws 1971, Chapter 222, Section 1), was intended to end a growing 1960s practice in local government (primarily by school districts) of creating supplemental employer-funded pension plans beyond the regularly applicable statewide pension plan for that type of public employee. At that time, public pension benefits were considerably more modest than they are currently and some of the more affluent jurisdictions were attempting to readjust their employees' pension coverage by local action, without the approval of or notice to the Legislature. The Legislature decided that this practice was inappropriate and that the creation of additional pension plans was an unwise policy. The Legislature also apparently felt that pension benefits should be as uniform as possible geographically throughout public employment. In 1973, the Legislature considerably improved pension benefits payable under the public employees primary pension coverage by moving from career average salary plans to pensions that were based on the average salary of the individual close to retirement. The intent at the time was to provide an adequate retirement benefit through the primary pension plan and eliminate the need, or the ability, to create supplemental plans. Those supplemental plans that were in effect prior to 1971 were grandfathered. Substantial statewide general employee retirement plan benefit increases occurred in 1980, 1989, 1992, and 1997.

A number of exceptions to the restriction on supplemental employer-funded pension plans have been enacted. Beyond the pre-1971 grandfathered supplemental pension plans, the 1971 legislation also excluded from its application group health, hospital, disability, or death benefits. In 1980 (Laws 1980, Chapter 600, Section 7), an exception was added for severance pay plans authorized under Minnesota Statutes, Section 465.72. In 1988 (Laws 1988, Chapter 605, Section 9), the State Deferred Compensation Program was modified to include a matching employer contribution in addition to the member's deferred compensation amount. The State Deferred Compensation Program is governed by Minnesota Statutes, Section 352.96. The State Deferred Compensation Program is the sole government sponsored retirement thrift or savings program for most public employees. Although the plan is administered by the Minnesota State Retirement System (MSRS), public employees throughout the state are authorized to participate. For purposes of the State Deferred Compensation Program, public employment includes volunteer firefighters. The State Deferred Compensation Program, akin to the somewhat similar Internal Revenue Code, Section 403(b), plans, function to encourage additional saving for retirement, supplementing income during retirement from the primary public pension plan, Social Security, or other income sources. State Deferred Compensation Program was established in 1971, by Extra Session Laws 1971, Chapter 32, Section 19. The matching employer contribution to the State Deferred Compensation Plan, authorized under Minnesota Statutes, Section 356.24, under the 1988 legislation was required to be made solely to the State Deferred Compensation Program, was required to be provided for in either a personnel plan or a collective bargaining agreement, was required to be a dollar for dollar match, and was limited to $2,000 per year per employee. While not restricted in use to fund retiree health insurance premiums, the employer matching contribution authorization was part of a broader legislative enactment pertaining to retiree health benefits, and the conferees on Laws 1988, Chapter 605, discussed the potential for the savings promoted by the employer matching contribution authorization to be used in part to defray post retirement health insurance premium costs.

In 1992 (Laws 1992, Chapter 487, Section 4), similar authority for an employer matching contribution feature for teacher tax-sheltered annuity insurance contracts under federal Internal Revenue Code, Section 403(b), was established by adding an additional exception to Minnesota Statutes, Section 356.24. The applicable tax-sheltered annuity insurance contracts are those issued by one of up to ten qualified insurance companies licensed to do business in this state, engaged in the life insurance or annuity business, determined by the Commerce Commissioner to be among the top two rating categories of a national insurance rating entity, and selected by the Minnesota State Board of Investment as providing competitive options and investment returns. Internal Revenue Code, Section 403(b), tax-sheltered annuity plans are vehicles for teachers, church workers, and certain other personnel of charitable institutions, to save on a tax deferred basis. These plans are not any public employee's primary retirement coverage; rather they act to supplement the primary plan. This permits eligible employees to have some individual control over their eventual retirement income. Internal Revenue Code, Section 403(b), investments are generally referred to as tax-sheltered annuities.

Also, in 1988 (Laws 1988, Chapter 709, Article 11), with the creation of the State University System/Community College System Individual Retirement Account Plan (IRAP), an exception for the IRAP Plan was added to Minnesota Statutes, Section 356.24. In 1989 (Laws 1989, Chapter 319, Article 12, Section 3), employer contributions to the Higher Education Supplemental Retirement Plan, established in 1965, were exempted from the application of the supplemental pension plan restriction of Minnesota Statutes, Section 356.24.

In 2001, two additional exceptions were added to the supplemental retirement plan restriction of Minnesota Statutes, Section 356.24. The exceptions are for employer contributions to a supplemental plan or governmental trust established for post-retirement health care expenses under the federal Internal Revenue Code as set in the employer’s personnel policy or set by a collective bargaining agreement and for employer contributions up to $2,000 annually to the Laborer’s National Industrial Pension Fund as set in a collective bargaining agreement.

In 2002, the provision was clarified to not apply to a supplemental pension plan that is organized under Internal Revenue Code, Section 401(a), that is solely and wholly funded from employee-accrued benefits and was expanded to include exceptions for the laborer’s national industrial pension fund and for the plumbers’ and pipefitters’ national pension fund.

H.F. 997 (Mullery); S.F. 847 (Langseth) would expand the 2002 exception to the supplemental retirement plan restriction for the plumbers’ and pipefitters’ national union pension fund to include local plumbers’ and pipefitters’ union pension funds.

The proposed legislation raises several pension and related public policy issues that the Commission may wish to consider and discuss, as follows:

1. Appropriateness of Local Pension Fund Exception. The policy issue is the appropriateness of expanding the 2002 plumbers’ and pipefitters’ national pension fund exception to the general restriction on employer-funded supplemental pension plans, given the recent creation of the plumbers’ and pipefitters’ union pension fund exception and the failure of its proponents to include this aspect of the exception in the 2002 legislation. The 2002 exception for the plumbers’ and pipefitters’ national union pension fund was added by amendment in the Commission, with less scrutiny than if the proposal had been introduced as proposed legislation and staffed out in the normal course of Commission operations. Hence, the Commission staff knows little about the plumbers’ and pipefitters’ national union pension fund coverage and even less about the nature, scope, or magnitude of local plumbers’ and pipefitters’ pension fund coverage. The Commission should consider taking appropriate testimony from knowledgeable parties about these local pension funds in order to gain that information base.

2. Precedent for Further Local Trades and Related Union Pension Fund Exceptions. The policy issue is the precedent for local trade union and related union pension plan exceptions to the general restriction on the creation of employer-funded supplemental retirement plans. If this exception is added, it is highly likely that additional local pension fund exceptions will be sought in the future and little in the way of policy arguments have been presented in connection with this proposal to assist the Commission in handling the policy implication of those additional requests.

3. Continued Appropriateness of the Supplemental Plan Restriction After So Many Exceptions. The policy issue is the appropriateness of retaining Minnesota Statutes, Section 356.24, when there are currently almost a dozen exceptions to the regulation. The provision was enacted in 1971 to prevent public employers from creating supplemental pension plans as an "end run" around the major general employee benefit plans when those major general employee benefit plans were probably inadequate. Since the 1973, 1989, and 1997 major benefit plan improvements, the major general employee benefit plans are no longer clearly inadequate, which should argue for even greater restrictions on fragmented supplemental pension plan coverage. However, providing mechanisms for encouraging individual savings for retirement has been an implicit policy goal of the Commission and the Legislature in recent years and that encouragement argues for further exceptions. The Commission may be well served in undertaking an interim review of the future of the supplemental plan restriction.

Amendment LCPR03-113 clearly specifies that the additional exception relates to local plumbers’ and pipefitters’ union pension funds. The bill as drafted could potentially be read to create an exception for any local pension fund, and not just local plumbers’ and pipefitters’ union pension funds as suggested in the bill’s title.